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Debt Advisory Update

Happy Haircut Week!
I realise as I’m sending this that many of you may already be in the pub for the first time in over 3 months – I hope you have wrapped up warm or else can find a beer jacket.  

 

Debt weekly image - 12 April
TL / DR: Suing Banks; Die-BOR;  A Clutch of Convertibles 

1.  Agent Litigation

  • A couple of updates to banking fluffs we’ve discussed before: Citi’s $900m “bank error in your favour” and Cineworld (or its lawyers K&E) accidentally adding a Libor floor.
  • Citi / Revlon first.
  • After Citi accidentally paid off Revlon’s loan, Citi believes that Revlon still owes its loan, but this time to Citi through some sort of subrogation.  It definitely feels wrong that Revlon doesn’t owe anyone the loan but the judgement was very clear that the debt had been discharged.  And Revlon’s general indemnity to Citi excludes losses due to “gross negligence” (s9.7 of its loan agreement).
  • Last week, while arguing for the return of its lost money pending its appeal, Citi made the surprising assertion that this was not an unprecedented error because another lender had once made an even bigger mistake but declined to name who it was.  A bit like my friend at school who talked about his mysterious model girlfriend but unfortunately his only picture of her was torn from the Littlewood’s catalogue.
  • Cineworld has apparently pushed Barclays to take responsibility for the extra Libor floor which is costing it $20-30m p.a.  Barclays is Agent and lead bank on the Cineworld debt and presumably was involved at some point in drafting the agreement.  But as one client said to me recently, as borrower your loan agreement is your own responsibility, no matter how many legal advisers or banks are involved.
  • On a related note, US investors are making headway in their attempt to sue GS (and others) for securities fraud for their failure to live up to their stated values during the financial crisis of 2008.  Goldman’s defence is that these were just “boilerplate aspirational statements” which is tough for the consultancy that dreamt up “Our clients’ interests always come first” and “Integrity and honesty are at the heart of our business”.

2.  Libor down and die

  • Libor really is leaving the building, at least Sterling Libor.  No sterling deals since 31 March can refer to Libor.  We’ve also seen SOFR for some recent US$ loans and the use of €STR for Euros is only a little further behind.
  • The movement from Libor to replacement rates usually involves agreeing to a Credit Adjustment Spread, available here.  We’ve found that it is sometimes possible to negotiate away from the automatic inclusion of this additional cost.
  • Next step is to rework all the rest of the existing loan agreements that don’t need to be refinanced in full refinance just now …
  • UK banks are trying hard to hold firm on using standard LMA language, which frankly is probably fine – despite all the time spent trying to get this right, I’m sure there will be gremlins that emerge over the next year or so.  This is more of an issue for large syndicated leveraged borrowers than relationship bank clubs.
  • Every bank has produced more material than you could ever want but frankly they are all struggling to keep their materials current – I think HSBC’s page is one of the best
  • I quite like the proposed New York law which will simply change what “Libor” means in any NY contract – this practical approach reminds me of some of my undergraduate philosophy.

3.  “It’s Always The Right Time To Issue a Convertible Bond”, says Convertible Banker

  • Two more UK-ish convertibles last week, from Asos and TUI, with very different motivations
  • Asos is tapping into the traditional bullish market for convertibles: highly-valued (often Tech) businesses looking for expansion capital and which would not be rated as “investment grade” and which have long-term secular trends on their side.  See Ocado and Trainline in the UK and many more examples in the US (Airbnb, Twitter Spotify, Beyond Meat – all of where were zero coupon).
  • Asos’s bond pays a coupon of 0.75% and converts 47.5% above today’s price.  Investors assumed a “vanilla” credit spread of 275bp over risk-free rates i.e. high sub-investment grade.  Asos achieved a pretty value for the conversion option sold to investors (32% vol).
  • Key corporate finance objectives here were: low cash cost, decent size (£0.5bn ~ 6.5% of market cap), no financial covenants and no credit rating.
  • Tui is a different story and more like Cineworld’s deal a few weeks ago: a 5% coupon and a premium of 25%.  The credit spread works out to a yield of about 8% and it sold its option pretty cheaply (20% vol).
  • But Tui achieved very different corporate finance objectives: raise new liquidity now!
  • Potential UK issuers are generally limited to a max size for a convertible of 13% of market cap, as the underlying shares count against the 10% allowance for non-pre-emptive equity issuance.  But an illiquid issue of less than £80-100m can struggle to get traction with investors.  So practically the minimum market cap is about £700m.
  • Even more than most, convertible bankers definitely believe theirs is the right product for all occasions – because they can lead with it being debt or equity, depending on the situation.
  • But borrowers need to be careful with convertibles as there is some truth in the old saying that they are “debt when you need equity, and vice versa”.  As with many corporate finance problems (such as ratings triggers), Cable & Wireless demonstrates how things can go wrong: the acquisition by Vodafone was a handy solution to its difficulty in refinancing its award-winning convertible.
  • As well as getting good execution and underwriting terms, issuers (or their advisers) need to think carefully about how a convertible could fit in with the wider financing strategy, not least what its lending banks will think about the impact on credit and their business case.

UK Financings this week

  • Loungers extended last year’s emergency liquidity facility by 12 months (out to Oct-22)
  • AerCap signed a $24bn 364-bridge to back its acquisition of GE Capital Aviation Services with Citi and Goldman Sachs with take out expected ahead of closing the acquisition.
  • Goldman Sachs was also the joint lead bank on the other large bridge financing recently for National Grid – making the most of those ever-cheaper Marcus deposits.
  • Adept signed a new 3-year £45m debt facility with NatWest and Bank of Ireland (replacing Barclays).
  • Coats Group signed a new $360m 3-year revolving credit facility with ESG-linked margins tied to Coats’ published targets on energy intensity in production.
  • Petrofac extended most of its $700m RCF to July 2022 with an increased margin that reflects market conditions and not its recent troubles.  Abu Dhabi Commercial Bank could reach only to April 2022.

Mike Beadle

Managing Director, Debt Advisory

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